MODULE 1

Introduction to
Surveying
 LESSON 1

Basic Economic Environment and Concept

What is Economics?
According to Adam Smith “the study of the nature and causes of national wealth or
simply as the study of wealth”.
According to Alfred Marshall “the study of man in the ordinary business of life.”
According to Arthur Cecil Pigou “the study of economic welfare which can be brought
directly and indirectly, into relationship with the measuring-rod of money”
According to Lionel Robbins “the science which studies human behavior as a relation
between ends and scarce means has other alternative uses”.
According to Collins Dictionary economics is the study of the problems of using
available factors of production as efficiently as possible so as to attain the maximum
fulfillment of society’s unlimited demands for goods and services
According to Wikipedia “Economics is the social science that studies the production,
distribution, and consumption of goods and services.
In the simplest definition, Economics is the wise use of money and time.
Money is anything that is generally acceptable as a means of exchange (i.e.as a means
of setting debts) and at the same time acts as a measure and store of value.
Functions of Money
1. As a medium of exchange
2. As a unit of account
3. As a store of value
Engineering Economy is the analysis and evaluation of the factors that will affect the
economic success of engineering projects to the end that a recommendation can be
made which will insure the best use of capital.
Good or Commodity is defined as any tangible economic product that contributes
directly or indirectly to the satisfaction of human wants.
Service is defined as any tangible economic activity that contributes directly or indirectly
to the satisfaction of human wants.
Consumer Goods and Services are those products or services that are directly used
by people to satisfy their wants. Examples are food, clothing, cars, ref, TV, shoes, dental
and medical services.
Producer Goods and Services are used to produce consumer goods and services or
other producer goods. Machine tools, generators, factory buildings, farm machinery,
airplanes, buses and ships are examples.
Necessities are those products or services that are required to support human life and
activities that will be purchased in somewhat the same quantity even though the price
varies considerably.
Luxuries are those products or services that are desired by humans and will be
purchased if money is available after the required necessities have been obtained.
Market refers to the exchange mechanism that brings together the sellers and the
buyers of a product, factor of production or financial security. It may also refer to the
place or area in which buyers and sellers exchange a well-defined commodity.

Buyer or Consumer is defined as the basic consuming or demanding unit of a

commodity. It maybe an individual purchaser of a good or service, a household or a
government.

Seller is an entity which makes product, good or service available to buyer or consumer
in exchange of monetary consideration.

Perfect Competition (also known as atomistic competition) occurs in a situation

where a commodity or service is supplied by a number of vendors and there is nothing to
prevent additional vendors entering the market. There is an assurance of complete
freedom on the part of the buyer and seller.

Monopoly is the opposite of perfect competition. A perfect monopoly exists when a

unique product or service is available from a single vendor and that vendor can prevent
the entry of all others in the market.

Oligopoly exists when there are few suppliers of a product or service that action by one
will almost inevitably result in similar action of the others

Demand is the quantity of a certain commodity that is bought at a certain price at a

given place and time.

TYPES OF DEMAND
1. Elastic Demand occurs when a decrease in selling price result in a greater than
proportionate increase in sales. The demand for goods which are considered luxuries is
elastic, because a small decrease in cost will usually result in a big increase in sales.

2. Inelastic Demand occurs when a decrease in the selling price produces a less than
proportionate increase in sales. The demand for goods which are considered as
necessities is inelastic because even a big decrease in selling price will not cause a big
increase in the volume of sales.

3. Unitary Elasticity of Demand occurs when the mathematical product of volume and
price is constant.

Supply is the quantity of a certain commodity that is offered for sale in a certain price at
a given time and place.

The Law of Supply and Demand states that under conditions of perfect competition.
the price at which a given product will be supplied and purchased is the price that will
result in the supply and the demand being equal.

The Law of Diminishing Returns states that when the use of the factors of production
is limited, either in increasing cost or by absolute quantity, a point will be reached
beyond which an increase in the variable factors will result in a less than proportionate
increase in output.
 LESSON 2

INTEREST

Interest is the amount of money paid for the use of borrowed capital or the income
produced by money, which has been loaned. It is the amount of money earned for a
given capital. From the borrower’s viewpoint, interest is the amount of money paid for
the use of borrowed capital. From the lender’s viewpoint, it is the income generated by
the capital that was lent.

Cash flow diagrams may be drawn to help visualize and simplify problems having
diverse receipt and disbursement.

Conventions Used in Cash Flow Diagram

1. The horizontal (time) axis is marked off in equal increments, one per period, up to the
duration or horizon of the project.
2. All disbursement and receipt (cash flow) are assumed to take place at the end of the
year in which they occur. This is known as the year-end convention. The exception of
the year end convention is the initial cost (purchase cost) which occur at t = 0.
3. To or more transfer in the same period placed end-to-end may be combined into one.
4. Expenses incurred before t = 0 are called sunk cost and are not relevant to the
problem
5. Receipt ad disbursement are represented by arrows on opposite sides of the
horizontal time axis,

ILLUSTRATIVE PROBLEM

An electronic equipment costs P30,000. Maintenance cost is P3,000 each year, The
device will generate revenues of P15,000 each year for 5 years after which the salvage
value is expected to be P12,000. Draw and simplify the cash flow diagram.
This is the simplified cash flow diagram

Types of Interest

1. Simple interest is the interest paid on the principal (money lent) only. It is paid on
short term only in which the time of loan is measured in days only.

I = Pni
F=P+I
F = P + Pni = P(1 +ni)
where: I = interest
P = principal or present worth
n = number of interest periods
i = rate of interest per interested period (if not specified consider
per year)
F = accumulated amount or future worth
a. Ordinary simple interest is computed on the basis of 12 months of 30 days
each or 360 days a year.
D
I = Pr( )
360

b. Exact simple interest is based on the exact number of days in a year.

D
I = Pr( )
365
Simple Discount
I = Fdt
where: F = amount due at the end of time
d = discount rate
P=F–I
P = F – Fdt
P = F(1 – dt)
Banker’s Discount
d
I=
1−d
ILLUSTRATIVE PROBLEM
1. A mechanical engineer borrowed the amount of P10,000 for 80 days at 12% per
annum simple interest. How much will be due at the end of 80 days?
Solution
 80
F = P + I = P + Pni = 10000 + 10000( )(0.12) = P 10,266,67
360
2. The amount of P20,000 was borrowed from a lending investor at an interest rate of
5% per month. How interest is he going to pay at the end of 10 months?

Solution

I = Pni = 20,000(10)(0.05) – P 10,000.00

3. Price tag of 1,200 pesos is payable in 60 days. A 3% discount is offered if paid in 30

days. What is the rate of interest?
Solution

Discount = .30(1200) = 36
Payment in 30th day = 1200 – 36 = 1164
I = Pdt
30
36 = 164(d) ( )
360
d = 37.1%
4. It is the practice of almost all banks in the Philippines that when they grant a loan, the
interest for one year is automatically deducted from the principal amount upon release of
the money to a borrower. Let us assume that you applied for a loan and P80,000 was
approved at an interest rate of 14% of which P11200 was deducted and you were given
a check of P68800. Since you have to pay the amount of P80,000 one year after, what
then will be the effective interest rate?
Solution
11200
I= = 16.28%
68800
another solution
d 0.14
I=
1−d
= 1−0,14
= 16.26%

2. Compound Interest – the interest for an interest period is calculated on the principal
plus total amount of interest accumulated in previous periods. It means “interest on top
of interest.” To demonstrate this, consider an investment of P1000 to earn 10% per year
for nine years. The following diagram shows how the money grows.
Elements of compound interest
I=F–P
Where: I – interest earned
F – future worth or compound amount
P – present worth or principal
F = P(1 + i)n
I – effective interest per compounding period (per interest period)
r
i=
m
r – nominal interest rate
m – number of compounding per year
(1 + i)n – single payment compound amount factor
n – total number of compounding
n=txm
t – number of years of investment
F
P= n
(1+i)
F
– single payment present-worth factor
(1+i)n
Values of i and n
nominal interest rate, r = 12%
number of years of investment, t = 5 years

Compounded annually (m = 1)
0.12
i= = 0.12
1
n = 5(1) = 5
Compounded semi-annually (m = 2)
0.12
i= = 0.06
2
n = 5(2) = 10
Compounded quarterly (m = 4)
0.12
i= = 0.03
4
n = 5(4) = 20
Compounded monthly (m = 12)
0.12
i= = 0.01
12
 n = 5(12) = 60
Compounded bi-monthly (m = 6)
0.12
i= = 0.02
6
n = 5(6) = 30
Continuous Compounding (m → Ȣ) – interest may be compounded daily, hourly, per
minute, etc. As a limit, interest may be considered to be compounded an infinite number
of times per year. The future worth of P at an interest rate of r compounded continuously
for t years is:
F = Pert

Nominal and Effective Rates of Interest

Nominal rate is the rate quoted in describing a given variety of compound interest.
consider a bank deposit of P1000 to earn 6% compounded quarterly. After one year, the
compound amount F is
F = P(1 + i)n = 1000(1 + 0.06/4)4 = 1061.36
Notice that the interest earned is P51.36 representing 6.136% of 1000 (not 6% of 1000).
For this case, 6% (compounded quarterly) is called the nominal rate and 6.136% is the
effective rate. Thus the effective rate (ER) is the actual interest earned in one year
period. This can be computed by either the following:

interest earned ∈one year

ER =
principal at the beginning of one year

r
ER = (1 + )-1
m
|Thus the effective rate of 6% compounded quarterly is, ER = (1 + 0.06/4)4 – 1 = 0.06136
or 6.136% as computed previously. The effective rate of r compounded quarterly is
ER = er – 1

Sample Problems
1. What rate in percent compounded semi-annually is equivalent to 20% compounded
annually?
i 2
(1 + ) = (1 + 0.20)1
2
i = 19.09%
2. Which has the highest effective annual rate of interest
a. 12% compounded monthly
b. 12.25% compounded quarterly
c. 12.5% compounded semi-annually
d. 12.75% compounded annually
Solution
0.12 12
a. i = (1 + ) –1
12
i = 12.68%

0.1225 4
b. i = (1 + ) –1
4
 i = 12.82%

0.125 2
c. i = (1 + ) –1
2
i = 12.50%

0.1275 1
d. i = (1 + ) –1
1
i = 12.75%

Highest is 12.5% compounded semi-annually

3. An investment of P200,000 earns 10% per annum compounded bi-monthly. How

much will it earn in 6 years.
Solution
F = P(1 + i)n
0.10 2x
2P = P(1 +
6
)
2x = (1.08)2x
2x ln 1.06 = ln 2
x = 4.5 yrs

4. What is the difference between the total simple interest and the total compound
interest on a savings of P100,000 at 7.5% per annum for a period of 5 yrs?
Solution
I = Prt = 100,000(0.075)(5) = 37,500
F = P(1 + i)n = 100,000(1.075)5 = 143562.93
I = F – P = 43563
Diff. = 43563 – 37500 = P6,063